Often, the simpler and clearer the insurance coverage, the better it works. Finding the right policy, at the right price and for the proper amount of protection is the goal. However, sometimes circumstances necessitate a zig instead of a zag. In this case, the complicating factor was the applicability of more than one policy.
A poultry farmer had coverage under two policies when a loss occurred. A fire broke out that damaged two of the policyholder’s poultry houses. He filed a claim with both his insurers and a problem arose because of policy wording. One insurer denied its policy’s protection alleging that, what was essentially an “Other Insurance” clause, barred coverage. The remaining insurer sued.
Below are details on how a court ruled on a situation that it labeled to be mutually repugnant.
At the time that a fire destroyed two poultry houses, their owner carried two policies on them that covered fire loss, each of which included an “escape” clause. The pertinent provision in the policy issued by the first insurer stated: “This Company shall not be liable for loss occurring:….(d) while the insured shall have any other contract of insurance, whether valid or not, on property covered in whole or in part by this policy.”
The policy issued by the second insurer provided that: “This Policy does not cover any loss or damage which at the time of happening of such loss or damage is insured by, or would, but for the existence of this Policy, be insured by any other insurance policy or policies either as primary or excess.”
The second insurer sought a declaratory judgment with regard to the application of coverage. The district court, noting that its “escape” clause was based on the time of loss, determined that it was not activated because the first policy “no longer covered the poultry houses.” It determined that the insured, upon buying the second policy, activated the “escape” clause in the first policy. This had the effect of relieving the first insurer of liability, according to the court.
Reviewing Arkansas law, the appeal court concluded that the two “escape” clauses were functionally equivalent; “either policy would insure the loss if the other policy did not exist.”
It noted that “….an “escape’ clause serves to avoid double recovery by an insured who holds two or more policies covering the same risk….but does not otherwise suspend an insurance policy’s coverage….”
The court concluded that the two “escape” clauses were mutually repugnant and that the policies must share pro rata liability. Accordingly, the judgment of the district court was reversed and the cause remanded to it for fixing each insurer’s pro rata liability.
(UNDERWRITERS AT LLOYD’S, LONDON, Appellant v. PIKE ET AL., Appellees. United States Court of Appeals, Eighth Circuit. No. 92-1230WA. October 21, 1992. CCH 1993 Fire and Casualty Cases, Paragraph 4015.)
Guarding Against Insurance Overpayments
The issue mentioned above illustrates how policy wording and the coverage intent of insurers have, historically, been dynamic. Insurance is meant to get a person who suffers a loss back to the financial position they enjoyed before the loss happened. Therefore, insurance companies have a powerful interest in eliminating situations where a person is paid more than the actual amount of a given a loss.
Excessive payments are possible due to the existence of different policies and/or different provisions within a single policy which could cover a given loss. While the court case we featured made reference to “escape clauses,” policies usually title such provisions “Other Insurance,” to deal with duplicate protection.
Here is a discussion of the Other Insurance provision that is one of hundreds of topics from E-Marketing For Agencies found in Advantage Plus.
A loss can become complicated when more than one source of insurance protection exists. Most insurance policies contain what is called an “Other Insurance” provision to deal with redundant coverage. To help explain this provision, consider the following situation:
It’s a clear day and Joe is driving home from work. He approaches an intersection, the light just turns yellow, and he picks up speed, so he doesn’t have to stop. He begins to smile, thinking he beat the light. His smile is knocked off his face as he slams into a pickup operated by a driver who anticipated a green light. Later, as he is dealing with reporting the claim, he finds not one, but two different auto policies. He had recently switched insurance companies but, by mistake, his new and old policies overlapped by exactly one month. “Great” he thinks, “I have double the coverage I need!”
Two sources of protection for a single loss? That may appear to be a good situation, but it violates an important point of insurance. Insurance is designed to protect persons against losses; but NOT to permit persons to profit by them. In Joe’s situation, while he might like to be paid in full for his loss by Company A and Company B, that is not going to happen. It is almost guaranteed that each policy will contain language that addresses “other insurance” situations.
When an insurance company is aware that another source of coverage exists for a loss, it makes an important adjustment. It wants to reduce the amount of money it has to pay for a loss, but it also attempts to be fair to its customer as well as to persons who want to collect for their injuries or for damage to their property. An “other insurance” provision explains how the insurance company will respond in such situations. Approaches will differ according to the company. Usually a company will either share a loss or it will try to make itself an excess source of coverage.
When a company shares payment, it may do so on either an equal or on a proportional basis. In the former, each company will just split the coverage and pay for half of the loss. However, since two companies may have policies with different limits, they may cover the loss according to their proportion of coverage. The proportion is determined by adding the total amount of coverage provided by the companies and calculating each company’s percentage of that total amount. If a company responds on an excess basis, its policy language will indicate that, when another source of coverage exists, its policy will only contribute to a loss payment after the other source is exhausted.
Regardless the approach that is used, the intent is the same. The total amount paid for a given loss remains no greater than if only a single coverage source existed. Things become more complicated when additional sources of coverage apply, but the total payment result is the same……the other insurance clause makes certain of that.
How “Other Insurance” Provisions May Be Applied
Other Insurance provisions discuss how a policy responds to an eligible loss to which other sources of coverage exist. There may be other titles used but the approaches tend to work to control how coverage applies so that the policyholder receives fair reimbursement. Some policies are narrower, only taking into consideration other existing insurance policies. Others are broader, taking into consideration any and all available coverage sources. They would adjust coverage for additional protection such as contractual arrangements, warranties, or protection plans. Other insurance provisions may do one or more of the following:
• Permit another source of coverage to pay on a primary basis, holding off on coverage until the other source is exhausted.
• Participating in coverage in equal shares – each coverage source pays an equal amount of the loss
• Participating in coverage on a pro-rata basis – each coverage source pays according to the proportion of protection it bears in relation to the total available protection.
Here is an excerpt from AAIS Farmowners Program: FOwww.yout-20-Additional Policy Conditions And Property Coverage Terms from PF&M Analysis found in Advantage Plus.
FO-20–Additional Policy Conditions and Property Coverage Terms contains six conditions and terms that apply to policies written in the American Association of Insurance Services (AAIS) Farmowners Program. They are:
- Additional Policy Conditions Applicable to All Coverages
- Additional Policy Terms Applicable to All Property Coverages–General Exclusions
- What You Must Do in Case of Loss
- How Much We Pay for Loss or Claim
- Payment of Loss or Claims
- Other Conditions
6. Insurance Under More Than One Coverage
The most the insurance company pays is the actual amount of a loss, regardless of the number of coverages that may apply to a single loss.
Note: This is an indemnity principle because an insured is not entitled to profit from a loss. Insurance is intended to return an insured to the condition that existed just before the loss, not to improve its condition.
7. Insurance Under More Than One Policy
The insurance company pays only its share of the loss or damage if there is other insurance that also applies to the loss or damage. That share is the part of the loss that this policy’s limit bears to the total amount of all insurance that applies to the loss.
It’s Best To Manage Client Expectations
It may be that an insurance professional’s clients may never run into duplicate coverage situations. However, should they arise, they have the potential to be a serious problem. How policy wording explains its applicable provision has an influence. If the information is simple and clear, it’s more likely to be readily understood by a client. When language is difficult, it’s important that explanations are made in a manner that assures a client that a loss is properly addressed.
It is quite important to be familiar with such provisions. If a client seeks help from their insurance professional, advice must be given confidently. Duplicate coverage scenarios, if handled poorly, may create unrealistic expectations. Few situations result in disgruntled policyholders quicker than receiving payments that are perceived to be insufficient.
Below are excerpts from an article that discusses what excellent agencies do when dealing with their clients. It comes from the archives of Rough Notes Magazine found in Advantage Plus.
PROMISES TO CLIENTS
Declare your value proposition both inside and outside your agency
By Chris Paradiso, Cpia
As independent agents, we must stand out from the crowd. Coupling technology with our customer focused and local presence lets us do just that. But it’s not enough to just be different. Customers and prospects need to understand how we’re different.
In our agency, we do that with our Promises to Clients. Here they are (some):
• Promise #1: We work for YOU. You are our boss. Our main goal is to make your insurance life as easy as possible. As an independent insurance agent, I must offer clients and prospects options and choices and must share those choices. That sets us apart from captive agents. We educate buyers in our marketing efforts, and technology helps us deliver.
• Promise #2: When you need something, you are our #1 priority. You will have our undivided attention. We will listen to you and learn about your life and property, so we can protect you properly. Prospects and clients deserve our undivided attention; it’s our responsibility to reach out and learn what’s changed in their lives. This lets us upsell and ensures that coverages truly align with needs. For instance, learning that a child will be added to an auto policy opens an “umbrella” discussion. It’s a service opportunity that benefits the agent and agency, too.
• Promise #3: We’ll take the time to make sure you understand your options. Insurance can be complicated; when you understand what you’re purchasing and what the product does, you feel more comfortable selecting insurance options with us that fit your business or family needs. Again, sharing options lets us explain the difference between independent and captive agencies. It’s a huge education opportunity and marketing advantage we must leverage.
• Promise #4: It’s our job to alert you to insurance products you need. We are licensed to educate and properly protect what you have worked hard for. We will listen to you and identify solutions to problems or upcoming needs. More than simply finding problems, we must offer clients and prospects solutions that they can easily understand. Yes, we’ve uncovered an issue, but we also have an answer for it!
• Promise #7: We will be sincere and direct when we have to deal with any challenges. If we make a mistake, we will own it, alert you and explain exactly how we’ll fix it. We’re all human and make mistakes. Clients understand. The best thing we can do is own it and make it right!
• Promise #11: We’ll set your expectations on every call. The team will always let you know the next steps and a time frame. If we can’t meet that time frame, we will alert you and reset your expectations. How can we stop prospects from shopping? Set an expectation they agree to. For example, someone calls wanting a home insurance quote. We’ll gather as much information as possible and, before we hang up, we’ll say, “We’ll call you back by tomorrow at 3. Does that work for you?” People want this and it will help your agency earn business.